Financial institutions serving micro and small enterprises can play a critical role in assisting their client base to manage their risks. Effective risk management includes activities that enable risk prevention and preparation, as well as risk transfer. This leads to an improved risk profile over time, which benefits small enterprises and the financial service providers that are serving them.
Building integrated solutions use savings as an anchor, which has three main advantages over credit as the entry point. First, most people need savings and so savings-linked products can appeal to a wider pool of clients, not just the subset of people who borrow money. Second, savings products typically have a longer duration, providing a platform for financial service providers to offer more permanent protection and build customer loyalty. If loans were the anchor, what would happen when the loan term ends if the client is not ready to re-enrol immediately? Third, taking a loan is risky for borrowers to begin with, so it is contradictory to think that a risk-management solution could be built on a risk-taking activity.
In our work with microfinance institutions in Asia we found that the introduction of a new service significantly impacts the job descriptions and workload of both management and frontline staff. If management perceive this as extra work without sufficient compensation, or without clear performance measures linked to resilience-related activities, they will likely deprioritize these activities. Similarly, for frontline staff, if incentives are tied to loans without any key performance indicators for savings and insurance, then the field staff will naturally focus their attention on the lending activities at the expense of effective risk management solutions. This is not a new issue, but it persists due to resource constraints faced by most microfinance institutions.
To learn more about design considerations for integrated risk management products, see our latest Social Finance Brief, Financial services to enhance resilience.
